Financing a new 4×4? Know the 8 common traps (and how to avoid them)

Bymr4X4March 5, 2020
Financing a new 4×4? Know the 8 common traps (and how to avoid them)

Buying a new 4X4 is one of life’s great purchasing moments, here are the eight common traps buyers face and how to avoid them. 

In almost every single article you’ll ever read about buying a new vehicle will be the line that, next to a house it’s the biggest purchase of your life. And, indeed it is. But what’s the best way forward. We explain the eight common traps when it comes to financing a new 4X4 and how to avoid them.

Accepting the first offer

Shopping for 4×4 finance is like buying anything else. You’ve gotta get three quotes. Why? If you go with the first option you’re offered, how will you ever know it’s a great deal? Hint: it’s not because the person offering you the finance tells you it’s a good deal. Sure, you could trawl google sifting through endless finance advice articles and get educated, but most of these are as dry as toast. And who has the time? Instead of attempting to become an overnight vehicle finance expert, getting three (or more) quotes gives you the information you really need – which finance type offers the best deal for you, and who can give you the best offer. Gathering those quotes can be a time intensive process; Good brokers will have what’s known as a “lending panel” that provide the broker a quotation for a certain loan. It takes little effort on your part – it pays to include different methods and types of vehicle finance – and by picking the best of them you’ll grab the low-hanging fruit and make an easy saving right off the bat. Using a broker such as Savvy Car Loans can provide you with many different quotes that are tailored to your exact situation.

Being dazzled by 0% finance

Car dealer finance can be a great way to get into a new 4X4 sooner. But we’re emphasizing the CAN. One catch is that it can come packaged with vehicle pricing that’s higher than it might be if purchasing outright. Yet the main thing is to not be blinded by the figures the dealer’s business manager will attempt to dazzle you with – an often impressively low interest rate, and a surprisingly manageable weekly repayment. Why is that, you ask? Read on…

Getting interest rate tunnel vision

How do you know if an interest rate is competitive? You don’t really need to… You see when it comes to dealer finance, other types of vehicle financing or novated leasing, there is just one figure that you must be fixated on, and it’s not the rate. It’s a figure that makes the interest rate, fees and charges and even the price of the vehicle irrelevant. What is this magic figure? Total loan cost. That’s it. The total cost of owning the vehicle over the term for a given finance offering (less any tax deductions that apply) is the most important figure and the only way to compare one deal with another. It rolls all the other figures into the one number that’s going to dent your bottom line – or otherwise. Of course, you need to consider the weekly repayment and make sure you can handle the regular outlay. But otherwise, total loan cost is everything, okay?

Buying ‘to save on tax’

In the words of an especially wise accountant we spoke to, “You’ll always be financially better off not buying than buying ‘to get the tax deduction’”. In other words, the tax saving that may be possible on a financed ute used for business, or in conjunction with a novated lease, should not be a major driver for making the purchase, it should just be considered a handy bonus. A novated lease, by the way, is a finance arrangement under which your employer pays your car lease and running costs using a combination of pre-tax and post-tax deductions from your salary. The tax saving can make a novated lease worthwhile for some employees however the benefit varies from case to case. It’s typically a poor choice for those who do less than average kilometres per year, for example. Just as with any major financial decision, it pays to ask your accountant’s advice. And be aware that because the cost of finance and other inclusions under a novated lease are packaged, the fact they’re often less competitive than other offerings in the market may not be obvious.

Having too big a ‘balloon’

The motor trade calls it being ‘upside down’ and it’s the unfortunate outcome of having too large a ‘balloon’ payment or residual – the amount that’s left to pay at the end of the loan term. The things that are ‘upside down’ are the figures at the end of the term, when your overly large balloon payment is greater than the market value of your now battered 4X4. And it means you’ll have to come up with funds just to let go of your old machine, even before you think about paying for the new one. Don’t get us started on whether rolling the shortfall into the finance on your next vehicle is a good idea. Hint: it’s not. Okay, so how do you avoid being ‘upside down’? Even the very best 4X4s with the highest resale lose about 30 per cent of their value over the first three years. It’s no coincidence, then, that a sensible balloon is about 30 percent at the end of a three-year term. The vehicle’s value will pay out the balloon and you won’t be in a hole.

Not owning your rig at the end

If you’re the type that gives your 4X4 a name, bonds with it over years of epic adventures, and likes to maintain, modify and otherwise make your rig your own, you might want to make sure it’ll actually be yours at the end of the finance term. At the end of some finance contracts, the vehicle is yours – after you’ve paid out any balloon that may be owing – while for others the vehicle is owned by the finance provider and you have no real option to keep it. Make sure you’re clear on this detail up front and factor it into your financing decision.

Having your loan rejected

Having your 4×4 loan application refused can be a blow. But with the right lender and approach, most people will have a good chance of gaining approval. Before you apply for finance, check your credit score, which is a score that tells lenders how risky it is to lend to you.

There are multiple sites listed on moneysmart.gov.au that let you check your credit score for free, so avoid providers that ask for a fee. A good credit score will stand you in good stead to breeze through approval, while a less good score might just mean using the right lender or taking steps to improve or correct your score before you submit a loan application. When you do apply, make sure you meet all of the lender’s requirements, complete the application correctly, and provide all the required supporting documents.

A loan application can be rejected because it’s incomplete, so here’s one really easy way to avoid having your finance declined. Your income, employment status and history, and whether or not you have other outstanding debt are the key factors when a lender assesses an application. Low income, a new job, self-employment and credit card debt can all be obstacles to some lenders. Yet, by taking steps the address potential issues up front, and/or choosing the right lender, you could soon be blazing a trail in your brand new 4WD.

  1. Paying overs for insurance

It can cost more than 10 percent extra to insure a 4×4 that’s leased or under finance. Why? Like everything with insurance, it comes down to your risk profile. Historically, customers whose vehicle is under finance have a higher chance of making a claim, and their claims are likely to be more costly.  While virtually every insurer will ask whether your vehicle is under finance, a specialty insurer such as club4x4.com.au can save you on your premiums elsewhere. This includes offering you discounts for completing 4×4 driver training, or for having more than one policy, as well as other perks.